Gold Deposit Scheme – RBI notification – bad for investors

Today evening the RBI has issued a notification that allows mutual funds and ETFs to invest the physical gold they hold on behalf of their investors into Gold Deposit Scheme with banks. I feel this is a bad move for investors.

RBI notification on Gold Deposit Scheme – February 2013

I will list some of the points in today’s notification that I am not comfortable with.

In terms of the Government Notification dated January 24, 2013 referred to above, a Trust including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations may deposit under the scheme.

Para 12 states that the deposits may be made available within a maturity range from three to seven years. It has now been decided to change the maturity period, of gold deposits, ranging from six months to seven years.

These two points are verbatim as compared to the RBI notification. It talks of modification to rules in an earlier notification. This notification for Gold Deposit Scheme 1999 was issued on September 14, 1999.

Point no. 5 in the 1999 notification says,

Repayment and payment of interest. – (i) The Gold Certificate shall be repaid in Gold. Such repayment may also be made in rupee equivalent to the price of Gold as on the date of maturity at the option of the subscriber. The option in this regard will have to be exercised in the manner prescribed by the designated bank.

ETF working background

An authorized participant first puts up physical gold with the AMC and gets “creation units” in return.

We as investors buy and sell from the authorized participant when we place orders on the exchange.

Authorised participants who sit between the AMC and the investor can redeem their “creation units” with the AMC and get their gold back from the AMC.

Questions to RBI

What happens if the authorized participant redeems its creation units and asks for its gold back from an AMC, who has placed the physical gold in a Gold Deposit Scheme in an approved bank?

I presume that the authorized participant may redeem their creation units with the AMC on any working day.

Is not there a mismatch between this one day and the minimum six month period that is talked of in the RBI notification respectively?

Is this not a liquidity risk in the system in a situation where the bulk of the AMC’s physical gold is parked in a Gold Deposit Scheme?

Questions to you

As listed in point no. 5 above, do you want your AMC to receive cash when redeeming its gold from a Gold Deposit Scheme?

The same cash which is being debased by unabated inflation in our economy? After all, there is a reason why you wanted to take exposure to gold, isn’t it?

Gold is one store of wealth that cannot be debased, unlike the Indian Rupee which purchases less every year because of the inflation in money supply. Don’t the actions of the government (import duty increases) and the RBI disturb you?

What I will do

I will check with the AMC that I have invested with and ask them whether they intend to park physical gold in a Gold Deposit Scheme. I will only be satisfied if they add a clause to their scheme documents that says that they will not park physical gold in the Gold Deposit Scheme.